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Good morning. Welcome to the Automotive Properties REIT 2023 First Quarter Financial Results Conference Call and Webcast. My name is Joanna, and I will be your conference operator today. [Operator Instructions]
Please be aware that certain information discussed today may be forward-looking in nature. Such forward-looking information reflects buy's current views with respect to future events. Any such information is subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those projected in the forward-looking information.
For more information on the risks, uncertainties and assumptions relating to forward-looking information, please refer to the REIT's latest MD&A and annual information form, which are available on SEDAR. Management may also refer to certain non-IFRS financial measures. Although the believes these measures provide useful supplemental information about financial performance, they are not recognized measures and do not have standardized meanings under IFRS. Again, please refer to the latest MD&A for additional information regarding non-IFRS financial measures. This call is being recorded on Friday, May 12, 2023.
I would now like to turn the conference over to Milton Lamb. Please go ahead, Mr. Lamb. That's great.
That’s great. Thank you, Joanna. Good morning, everyone, and thank you for joining us today. On me on the call is Andrew Kalra, our Chief Financial Officer. Our positive momentum continued in the first quarter as acquisitions and contractual rent increases drove year-over-year growth in revenue, cash NOI, same-property cash NOI and AFFO per unit. We made strong progress in our acquisition program so far this year.
In early January, we completed the acquisition of 6 full-service automotive dealership properties in Quebec for approximately $98.5 million, and as I discussed in our last conference call. And yesterday, we announced an agreement to acquire an automotive dealership property in Brossard, Quebec from a third party for approximately $16.1 million. The property is under lease with Group, Park Avenue for the Volvo and Jag Land Rover dealership and consists of 50,415 square feet on approximately 3.4 acres of land. This lease is subject to annual adjustments linked to Quebec CPI.
We expect to close the acquisition by the end of June and plan to fund the acquisition through draws on our credit facility and cash on hand. As a result of the Quebec property acquisitions completed in January, but excluding the Brossard property acquisition announced yesterday, a proportion of leases containing annual CPI-linked adjustments has increased. These leases represent approximately 26% of our full year base rent in 2023. This increased exposure to CPI-linked contracts increases contributed to our 2.4% same-property NOI growth in the quarter and further inflation-related growth going forward.
While we like the CPI-linked leases for the benefits in actual results, IFRS accounting does not reflect these CPI increases in the AFFO straight-line adjustments. The fundamentals of the Canadian automotive sector remains strong. According to DeRosa Automotive consultants, Canadian new light vehicle sales increased 5.2% in Q1 of 2023 compared to the same period last year, reflecting a reduction in the supply side constraints and continued consumer demand.
Statistics Canada has reported that overall automotive industry retail sales totaled approximately $188 billion in 2022, an increase of 6.8% from 2021. We believe these figures demonstrate the essential nature of the automotive retail industry.
I'd now like to turn it over to Andrew Kalra to review our first quarter results and financial position in more detail. Andrew?
Thanks, Milton, and good morning, everyone. Our property rental revenue for the fourth quarter totaled $22.9 million, a 12% increase from Q1 a year ago, reflecting growth from properties acquired during and subsequent to Q1 last year and contractual rent increases.
Total cash NOI and same-property cash NOI for the quarter totaled $18.8 million and $16.1 million, respectively, representing increases of 11.2% and 2.4%, respectively, compared to Q1 a year ago. Growth in cash NOI was primarily attributable to acquisitions and contractual rent increases, growth in same-property cash NOI primarily reflects contractual rent increases across our portfolio.
For Q1 2023, interest expense and other financing charges were $6.0 million, representing an increase of approximately $1.9 million from Q1 2022. The increase was primarily due to additional debt incurred to acquire properties during and subsequent to Q1 2022, together with an increase in interest rates. Our G&A expense in the quarter were approximately $1.4 million, up from $1.3 million in Q1 last year.
Net income was $17 million in the quarter compared to $29.7 million in Q1 a year ago. The decrease was primarily due to noncash fair value adjustments for interest rate swaps and investment properties, partially offset by higher NOI and noncash fair value adjustments for Class BLP units and unit-based compensation.
FFO and AFFO for the quarter increased by 0.7% and 0.4%, respectively, compared to Q1 2022. FFO per unit diluted was $0.241 in the quarter compared to $0.24 in Q1 2022. AFFO per unit diluted was $0.229 compared to $0.228 in Q1 a year ago. The increases were primarily due to the impact of properties acquired during and subsequent to Q1 last year and contractual rent increases. The REIT paid total distributions of $9.86 million or $0.201 per unit in the quarter, representing an AFFO payout ratio of 87.8%.
The AFFO payout ratio was lower in Q1 this year compared to 88.2% AFFO payout ratio in Q1 a year ago, primarily due to the impact of properties acquired during and subsequent to Q1 2022 and contractual rent increases. The capitalization rate applicable to the REIT's entire portfolio increased to 6.48% as at March 31, 2023 compared to 6.42% at year-end 2022. The increase primarily reflects the addition of the Quebec properties we acquired in January 2023.
In Q1 2023, there was a fair value loss of $3 million on the investment properties, primarily related to the write-off of acquisition costs in accordance with IFRS. We had $533 million of outstanding debt at quarter end, with an average -- with an effective weighted average interest rate of 4.1%. We continue to have minimal exposure to floating or short-term interest rates with 94% of our debt fixed through interest rate swaps and mortgages. We had a well-balanced level of annual maturities with our weighted average interest rate swap and mortgage term was 5.5 years with a weighted average term maturity of 3 -- we have ensured a debt of 3.6 years.
Earlier this month, we converted $25 million of outstanding revolving portion of debt in facility to a nonrevolving balance, which currently remains at floating rates. There were no changes to terms or credit spreads within this facility. We currently have approximately $82 million of undrawn capacity under our revolving credit facilities and 4, unencumbered properties with an aggregate value of $61.5 million.
I'd like to turn the call back to Milton for closing remarks. Thank you very much.
Thanks, Andrew. We continue to monitor the impact of the inflation environment and interest rates on our property portfolio in the overall real estate industry. We have strategically moved floating and short-term debt into fixed rate and/or long-term debt to further minimize any future interest rate increase impact. fluctuations in the interest rate environment, inflation and credit environment impact rental growth and capitalization rates overall in the real estate industry and also may provide attractive buying opportunities.
Looking ahead, we're well positioned to generate continued solid performance with our expanded property portfolio of essential retail, triple net lease structure and embedded fixed and CPI adjusted rental growth. We're also well insulated from potential interest rate increases due to the measures we have taken to secure 94% of our debt at fixed rates at quarter end.
This concludes our remarks. I would now like to turn it over for questions. Joanna, please go ahead.
[Operator Instructions] First question comes from Frank Liu at BMO Capital Markets.
Just wanted to touch on the acquisition of the Brossard property. Again, it's pretty good to see the underlying leases are CPI linked. I wonder if this would be one of the key criteria you guys focus on when looking at potential acquisitions going forward?
Yes. I mean we've always said we look at location covenants and then brand. In this case, all 3 work. The hard corner it's on an Brossard we think it's a great corner, 3.6 acres on a hard corner. Group Park Avenue, very good operators, a number of dealerships up and down that Tesoro Boulevard. And certainly, Land Rover, Volvo, electrification, all of that kind of world continues to do very well. And combine that with the embedded CPI adjustments that we -- this was from a third party. So we acquired the property with a lease in place, but we certainly like the CPI adjustments that we're in the lease. So it just kind of ticked the number of boxes and the cap rate was kind of right in the target zone that we have and are able to achieve in 2023 that as we've talked about before, we saw unrealistic expectations in 2021 and therefore, did not reach into our pockets to stretch, but certainly like seeing the returns and the opportunities that we're looking at now.
Perfect. With respect to cap rate, I know you guys don't disclose the specific number, but I wonder if this transaction trending in the range of like the 6.5 to 7.5 you touched on last quarter call.
Yes. It's right in the heart of that range.
Perfect. And then as you mentioned about location, so we have done like 7 assets so far this year in the Quebec market. Is there anything in the Quebec market that pretty suppressed effect that APR is in favor? Or are you guys looking at the deals across Canada, the deals just came through?
Yes. I think it's kind of 2 layers. The first layer is what do we like an APR. We certainly like the major metropolitan markets that are experiencing growth. And Montreal is very high on that list. But I think the real driver underneath our desire is the availability and that availability we've always talked about tends to be on transactions. And in this case, it was a previous dealer that sold their dealership, kept the real estate, and we acquired it from the previous owner, the previous dealership owner, sorry.
So I mean, this is just an example on the backup with a slight delay of M&A. And we're seeing more M&A that's occurred in the Montreal, Quebec area over the last 18 months than we've seen in many other areas of the country. So part of it is going on the M&A, back to the M&A focus and part of it is we just like the market.
Perfect. So one lastly, so given like the overall market start picking up, should we expect more to come for the remainder of 2023.
On the acquisition side, it kind of goes back to what we talked about in 2021 that we were competing with short-term money for dealers and dealers, if they're looking at 90-day BAs, we couldn't compete. They were 2%, 2.5%, whereas right now, your long term versus short term is inverted. So our money looks a lot more attractive. And therefore, we believe that we'll see a lot more opportunities.
The next question comes from Sairam Srinivas at Cormark Securities.
Milton and Andrew. Just going to corn a couple of quarters ago, Milton, I know we referred to dealership still mulling around the thought process of getting to the deal table in terms of selling their properties. Has that conversation changed? And can you probably give some color on the conditions you have in [ automation ] right now in terms of the motivations behind actually selling the properties now?
I don't think the motivations have -- the underlying motivations have changed. I do think when you're seeing your cost of capital across the board go up -- it just -- we tend to be more of a like-for-like comparison as opposed to when cost of capital, especially on kind of 30-day or 90-day money was so cheap. So we thought it was a bit euphoric in a moment in time in 2021, and therefore, it didn't stretch. And what we're seeing now is it's coming back into what is historically being a trading range in the cap rate world. And that's -- and certainly, we've seen that with our underlying valuations. We did not put value up and cap rates down dramatically during 2021 because we thought that was, again, a bit of in a bit of a blip and it's ended up being just that.
And just only focusing on the funding side of things, have bankers now started kind of being more optimistic on the space and how the competition will lend us in terms of the funding availability for acquisitions?
Yes. I wouldn't say now, but I would certainly say the combination of the performance, especially in the states of the public dealership groups, those public companies have been printing very good results, including during the heart of COVID. And so it really did allow people to kind of focus on, wait a sec, this isn't as cyclical because there's 4 engines that drive profits within the dealership segment. And it kind of got converted to cyclical to essential retail. And so whether it's up in risk departments and banks or just investors overall, they've certainly kind of looked at this as an area that's a lot more secure and bulletproof than they would have originally thought before kind of being able to see the public results over the last 5 to 10 years. So that certainly helped us.
The next question comes from Lorne Kalmar at Desjardins.
With you guys starting to see more on the acquisition side and leverage kind of being in the sort of mid-40s, maybe you can give some color on how you would -- how you would approach funding should a large portfolio become available.
Yes. I would still say we tend to see more deals at the end of the year than we do at the beginning. This was a delayed M&A. They sold the dealership well in advance, and then they decided to sell the real estate more recently. So that's kind of why you saw this in a non-normal seasonal trade. But to your question on larger portfolios, I mean, whether it's unit-based that they take back some units or it's just -- I hate to say it's math, but it is math. What's our cost of capital, what's our cost of debt and what's our return. And those have to align. I still think there's demand there, but certainly, that math has to work.
So would you be assuming the math works, and I'm not good at math, I'll leave that to you. Would you guys be okay taking the leverage up to kind of the 50% range if an opportunity is there that you guys really like?
Opportunistically, we could see doing that. We'd certainly have to, as I said, like the portfolio and I like the math.
Okay. And then just on flipping back to the acquisition, I think Group Park has probably about 15 or so dealerships. Is there a future pipeline there? Or was this kind of a one-off with the former dealership owner?
I don't know that answer, per se. I mean we certainly know a lot of the larger dealership groups and no one like Park Avenue. Everyone has different motivations at different times. So it's hard to say. But yes, to your point, this was not an acquisition from Park Avenue.
The next question comes from Jonathan Kelcher at TD Cowen.
First question, just on the Group Park acquisition, how long is the lease?
It's kind of a midterm lease. It's existing, so we're not supposed to be talking about exact details, but it's midterm.
Okay. Does it materially change your lease maturity profile?
No. I mean it's $18 million $16 million acquisition. So I would now. No, I would not say it materially changes it.
Okay. Fair enough. And the $25 million that you guys moved over post the quarter that's floating. Was that floating before. There's no change in that. Or is there a change…
Jonathan, $25 million was on the revolver. So that was floating. And now we have the ability -- we put it into nonrevolving, -- now we have the ability to place in that utilizing our swap strategy. We haven't done that yet. We just converted it a week ago. So it remains floating as of today.
Okay. So by next quarter, we should see the fixed rate, while assuming no more acquisitions, we should see fixed rate probably tick up a little bit.
Yes. I mean we follow a strategy of putting in swaps. So we'll see where the market goes.
Okay. And then lastly, just the G&A of $1.4 million for the quarter. Is that a good run rate for the rest of this year?
I think similar to Q4, I mentioned we don't provide a lot of forecast by line items. So we don't provide forecast by line items. But for your modeling, I think it is a good run rate with some increases for growth and inflation when you're modeling that.
The next question comes from Himanshu Gupta at Scotiabank.
So just on the acquisitions. Is the pricing different for a dealership with a midterm lease term versus like a long-term lease. It looks like the acquisition which you did, you mentioned it was like an existing midterm lease. Is the pricing difference compared to, let's say, a traditional 10, 15-year lease?
Not dramatically. We certainly like how the numbers are on this one, and we really like the corner. We think there's a lot of flexibility here, whether it's auto or whether it's other. So that always plays very well in our acquisition criteria and considerations. So it really does depend on the property and just depend on the covenant and overlay, as you just talked about the term. In our world, there's not a lot of difference between mid and long term as long as we really like the dirt.
Okay. Fair enough. And then sticking to the capital discussion, has [ cap rate ] stabilized now pricing in May compared to December when you did the last transaction. So has sellers' expectations further change since Christmas? Or I mean, the reset has already happened what it had to happen.
I would say kind of like gas prices, it's amazing how they go up very quickly, and then it takes a while to kind of pull back down. There are dealers that certainly like the pricing that suddenly went to in 2021 but not a lot of trades happen because people are scratching their head on those. And those are moving back up to the norm, the historical norms, but that's taking a little time and it depends on the vendor and if it's on the back of M&A and other considerations. But I mean, I think there's a quiet understanding that 2021 was a moment in time as opposed to kind of a regular industry situation.
Okay. Fair. Last question is on the Quebec acquisitions, which you completed in Q1. Would you say the rent on a dollar per foot basis is like significantly above the rents which you had on your earlier Quebec portfolio.
We touched on this, I think it was last quarter, too, is we're finding overall land prices and construction prices have gone up, so our historical portfolio is lower per square foot than we expect our acquisitions to be in the current market. And that's just on the back of certainly along Chomedey, Laval, that's high-quality land that's going to be at a price per acre, that's a lot more than it would have been 7, 8 years ago when we did this acquisition. And anyone who's done a renovation or any construction recently absolutely understands what the difference is in pricing for construction. A number of those assets were new construction are recently updated. So we're not surprised at the pricing per square foot, but it is different than it would have been historically.
Because this is the first time you have disclosed Q1 rents. And based on my calculation, the acquisition Quebec portfolio, the rents are like double than what you had before. So maybe that's a...
So the other comment I would make there is our largest building in Quebec is as much service as it is distribution, and that's the Tesla facility. And that naturally drags down the per put net rent numbers. But if you could impair Quebec to Toronto, Vancouver, it's a lot more in line with the recent acquisitions on a net per square foot. So there's a bit of an anomaly there because we know and like the Tesla distribution service deal, but it is a bit more -- it's as much distribution as it is retail.
Next question from Brad Sturges at Raymond James.
Just I'm curious, you had a good start to the year, and it's pretty back focused at the moment. Just curious if the acquisition pipeline -- if there's something about Quebec, specifically in the acquisition pipeline that's driving that or just happens to be the circumstances of the opportunities that you're able to get across the line right now?
It's a bit supply and a big demand. We like the market, and therefore, certainly like to see opportunities there, and we're finding that there are more opportunities there. And certainly, to achieve cap rates, we like Vancouver, but those cap rates that are a very different level than you'd see in other markets, including Montreal. So we like the underlying demographic growth. We like the economy within Quebec, down the auto, especially in EV world. Quebec provides subsidies. So that tends to be very strong. So it's a bit, we like it, and then we're seeing opportunities in it.
And I think you talked about some of the catalysts or the drivers of why we might start to see more M&A activity. I'm just curious, would we continue to see more activity through the summer months? Or do we still fall into more kind of historic goal seasonal trends and it tends to be more activity kind of at the back half or the end of the year?
We tend to see more activity at the back of the year. And I would say especially in 2023 because there is a bit of a buy-sell because certainly, 2021 and '22, the dealership business was extremely strong. It's going to remain strong, but some of those multiples and some of the underlying earnings, there's a bit of a feeling out on what they're going to be. So there tends to be what I'm hearing is a bit of a buy-sell gap on the M&A. And quite often, that buy-sell gap comes together a lot more at the end of the year, where vendors who are not just exploring the market, but interested in selling come to meeting of the minds with purchasers. But over the summer, I find a lot of people enjoy their summer.
So [ notable ] change then it sounds like from the, I guess, the activity level perspective.
We're not expecting to see a busy summer within the M&A world. And I can't say that hard and fast. It may be something that pops its head up, but we're not expecting it.
The next question comes from Tal Woolley at National Bank Financial.
Just at the risk of beating a dead horse on the Brossard deal. Just the way it was phrased -- are you acquiring the land only and not the building?
No, no, no. Yes. And as you go into the JLR, it's very nice. It's a gorgeous facility -- but we certainly -- if you do the Google maps, it's a really nice hard corner on 2 major streets, and that's always a good thing in real estate.
Got it. And then I guess, just thinking longer term about sort of trying to future-proof the assets that you have. Do you have dealers right now who are looking at either expanding buildings and maybe looking for capital to do that or even expanding infrastructure and thinking like the charging infrastructure and stuff like that, where maybe APR can play a role in terms of providing capital there?
Charging infrastructure is going to happen or has happened at a lot of these dealerships. It's just -- it's the natural evolution of the industry. They're going to have to have -- or most brands, if not all, are going to be both facilitating internal combustion and EV. So that we certainly will see. As far as expansions, when the cost of money was 90-day money very low, they were better off financing themselves. It will be interesting to see what happens now that, that short-term money is now at a rate that's a lot higher.
We do find, and we've talked about it before that because of the locations and the focus on metropolitan markets, that when you've got that radius clause of 8 kilometers, it's very tough to relocate. So therefore, a lot of dealerships, it's also tough to get the zoning in most of those markets. So a lot of those dealerships as opposed to relocating will expand on site. So it will be interesting to see how that unfolds. But we do expect at some point, people will knock on our door. And then if we see that the numbers work well, we'd certainly like to work with them. Okay.
But it's not a situation where you're looking around your network right now and you're like, oh, we know that there's 7 dealerships that are going to have to do some significant work over the next 3 years or something like that?
It's -- a lot of it is brand by brand. So you'll see certain brands go through reimaging at the same time. We don't love -- in the right situation, I guess we would. We don't love just changing cosmetics. If they're expanding the building, then it adds value to the real estate. And certainly, if they are doing a reimaging and looking at a lease extension, then that can make sense as well. So it really is case by case. And most of the dealerships that -- or the dealership groups that we work with are large dealership groups. So they have -- tend to have an ongoing CapEx plan within their entire portfolio. So sometimes it works to do it with APR and sometimes they'll just do it on their own book. Either way, we're pretty happy when we see things get expanded and/or renewed on the facility.
And just looking out further, the bigger you guys get, do you think about like more traditional, I guess, maybe the way to phrase it more traditional types of debt to you like just doing straight up term loans, that kind of stuff. Is that something you look to do because when I sort of look at the way you're debt structured, it's a lot of different facilities, a lot of different hedging options. I never wondered if someone's ever come in and pitch to you and say, hey, we could like we could redo this whole piece of debt in one structure and maybe cost a little bit less or...
Yes. Tal, I think, I mean, over the last while, we've added mortgages, so we have diversified. But just the future of us taking $25 million from the revolver and into a nonrevolver of amortized payments that we had paid on that line. That flexibility allows us with a considerable amount of ability to fund acquisitions and manage our debt. So I mean, we've been very successful over the last 7 to 8 years with the strategy of extending and maturing our debt within the 3 credit facilities. But we've been adding mortgages as we see fit on specific properties. So I think it's working well for us at this point in time.
I'm going to add to what Andrew said, I mean, I'd probably argue over the last 7 years, we've been able to demonstrate both the market and more or as importantly to ourselves that the flexibility that this provides is valuable. So we -- if anything, it's more confirmational a better strategy, we like it still. So the short answer is, as Andrew said, there will be opportunities for kind of the traditional mortgages, but we were fortunate enough when we created the REIT that we had the flexibility to put these credit facilities in place and therefore, allow flexibility to work with the real estate and not be handcuffed by existing financing. And so that's worked out very well.
There are no further questions. I will now turn the call back over for closing comments.
That's great. Thank you, everyone. We look forward to talking to you in August. Enjoy the summer.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.